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Roles Of Fannie Mae And Freddie Mac In The Mortgage Industry

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Roles Of Fannie Mae And Freddie Mac In The Mortgage Industry

This BLOG On The Roles Of Fannie Mae And Freddie Mac In The Mortgage Industry Was PUBLISHED On May 1st, 2019

What Are Roles Of Fannie Mae And Freddie Mac? To Set Standards Mortgage Guidelines Of Conventional Loans:

Fannie Mac and Freddie Mac are called Government Sponsored Enterprises also known as GSEs.

  • Fannie Mae and Freddie Mac are the two giant mortgage lending institutions for conforming mortgage loans
  • Most American homeowners and home buyers have heard of Fannie Mae and Freddie Mac but do not have the grasp of what their functions and role is
  • There are still many folks who ask what are the roles of Fannie Mae and Freddie Mac

Differences Between And Roles Of Fannie Mae And Freddie Mac

The answer to What Are The Roles Of Fannie Mae And Freddie Mac is the following:

  • When Borrowers need to qualify for Conventional Loans
  • Fannie Mae and Freddie Mac Guidelines need to be adhered to
  • Lenders who originate Conventional Loans need to follow Fannie Mae and Freddie Mac Guidelines in order for them to be able to re-sell the Conventional Loans they fund to Fannie Mae and/or Freddie Mac.
  • Both Fannie Mae and Freddie Mac will not buy Conventional Loans that do not meet their guidelines.
  • Conventional Loans are called Conforming Loans
  • Conventional Loans need to conform to Fannie Mae and/or Freddie Mac Guidelines.
  • Fannie Mae and Freddie Mac are private companies that are backed by the federal government. 
  • Fannie Mac and Freddie Mac is not a mortgage lender
  • Fannie Mae and Freddie Mac do not fund loans directly to the public consumer
  • The general public has no contact with Fannie Mae and Freddie Mac. 
  • Fannie Mae and Freddie Mac’s role is to purchase the majority of home loans that is originated and funded by banks, credit unions, and institutional mortgage lenders
  • Can relieve the mortgage lenders from their lines of credit so the mortgage lenders can fund more conforming loans
  • Both Fannie Mae and Freddie Mac have mortgage guidelines where lenders need to conform to it in order for the mortgage loan to be sold to Fannie Mae and Freddie Mac
  • After Fannie Mae and Freddie Mac purchases conforming loans from banks, credit unions, and institutional investors, they package them up as mortgage-backed securities  (MBS) which is then sold to investors in the open market
  • Fannie Mae and Freddie Mac’s main objective and mission is to provide liquid access to banks, credit unions, mortgage bankers, and institutional lenders who originate and fund loans to the public

What Is Secondary Market And How Does It Work?

When borrowers apply for a mortgage loan from ABC Mortgage Banker the mortgage banker will process and underwriter mortgage loan.

Here is the general mortgage process:

  • ABC Mortgage Banker has what is called a warehouse line of credit
  • They will use it to fund the mortgage loan
  • We will use a case study here where ABC Mortgage Banker has a $1 million warehouse line of credit
  • A warehouse line of credit is like a large credit card to be used solely for the purpose of funding mortgage loans. 
  • ABC Mortgage Banker’s mission and goal is to use part of that $1 million warehouse line of credit temporarily to fund the mortgage loan
  • Then re-sell the mortgage loan they funded back to either Fannie Mae or Freddie Mac
  • In order for Fannie Mae or Freddie Mac to purchase loans from ABC Mortgage Banker originates and funds, all of the loans need to conform to Fannie Mae’s and/or Freddie Mac’s guidelines
  • If ABC Mortgage Banker screws up and makes a mistake and a loan does not meet guidelines of Fannie Mae or Freddie Mac, then Fannie Mae and/or Freddie Mac will refuse to purchase the mortgage
  • On this case scenario, if Fannie Mae and/or Freddie Mac refuses to buy the mortgage loan from ABC Mortgage Banker, then ABC Mortgage Banker will need to hold the loan which will tie up the $1 million warehouse line of credit

How Do Resale Of Mortgages By Fannie Mae And Freddie Mac Work

The example below can explain on What Are Roles Of Fannie Mae And Freddie Mac to our viewers:

  • Once Fannie Mae and Freddie Mac purchases conforming loans from banks, credit unions, mortgage bankers, and institutional lenders Fannie and Freddie will package these loans into mortgage-backed securities to institutional investors
  • Institutional investors are pension funds and large money managers in Wall Street
  • This chain of events of lenders being able to sell loans to Fannie Mae and Freddie Mac
    • Fannie Mae and Freddie Mac relieve the lender of their warehouse lines of credit
    • This enables lenders to reuse their lines to originate and fund more loans
  • Packaging these loans as mortgage-backed securities and selling it to the secondary market to institutional investors where the investors make money from interest relieves the mortgage lenders to liquidity to generate more loans to public customers
  • They can start the whole cycle all over again and stimulate home purchases, refinance mortgages, and stimulate the economy

Which Is Better? Fannie Or Freddie?

Both Fannie Mae and Freddie Mac have the same goals and objective. 

  • Their mission and the reason why these two Government Sponsored Enterprises ( GSEs ) were created was to do the following:
    • provide capital
    • market liquidity
    • market stability
    • market affordability to the residential mortgage markets
  • The federal government launched Fannie Mae back in 1938
  • The Federal National Mortgage Association ( FANNIE MAE ) was created as part of the New Deal in 1938 under President Franklin Roosevelt
  • The goal for the creation of the Federal National Mortgage Association was for FANNIE MAE to purchase home mortgages from private mortgage lenders
  • It was also to stimulate home ownership and mortgage lending during the Great Depression
  • In 1970, the United States Congress created Freddie Mac
  • Federal Home Loan Mortgage Corporation was created to avoid Fannie Mae being a monopoly
  • It was also created to encourage competition and to expand the availability of residential mortgage loans

How Does Fannie Mae And Freddie Mac Benefit The General Public?

  • Consumers do not have any direct contact with either Fannie Mae or Freddie Mac  
  • However, Fannie Mae and Freddie Mac provide priceless benefits to homeowners and home buyers by working with the thousands of banks, credit unions, mortgage bankers, and institutional mortgage lenders by providing liquidity and capital to them
  • If Fannie Mae and Freddie Mac did not buy mortgage loans from private mortgage lenders, the private lenders will be limited on how many mortgage loans they can originate and fund due to lack of liquidity

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